When discussing ways to raise big money for the deep future, using these funds to eliminate all taxation garners the highest enthusiasm. Does this sentiment hold more generally across our Canadian population? I turned to research efforts to ensure I have not been getting biased opinions.
No surprise that a recent poll of British Columbians confirmed that people do not like to pay taxes. Research Co. and Glacier Media asked British Columbians in April 2021 [i] if the concept of taxes is equally off-putting regardless of its various forms.
As well, a Canadians for Tax Fairness 2020 analysis[ii] reported these top 5 tax priorities:
1) closing tax loopholes,
2) tackling tax havens,
3) making the tax system more progressive,
4) levelling the digital playing field, and
5) addressing climate change
To which I would add these unquantified concerns:
6) the inescapability of taxes and tax increases
7) wasteful government spending.
With all this discontent, a program to reduce and eliminate taxation in Canada would be welcomed by many.
If individuals can retire from work, why can’t governments retire from taxation?
We are all encouraged to save for retirement, and if we are diligent and fortunate, we can retire comfortably. To get to such financial independence does typically take forty years of work, but it is possible.
Zooming out to a society-wide view collectively, our Canadian governments corral almost one trillion dollars per year in taxes. Retirement financial plans advise spending just four percent of invested funds to provide for annual spending in perpetuity. Thus to “retire” on a pension from investments that provided a trillion each year, our governments would need investments worth twenty-five trillion dollars.
That investment level is undoubtedly a lot of money, but raising enormous sums without additional contributions or taxes is within our grasp if small initial funds are allowed to grow over many years. Society as a whole can wait many decades and even centuries. Individuals cannot wait that long.
If we are willing to think beyond our own lifetime, what are the steps needed for society to retire from the practice of taxation?
Step one: Raise twenty-five billion dollars in seed funds
Assume each government (federal, provincial, municipal, and indigenous) set aside 0.1% (one billion dollars) of their annual budget for twenty-five years. The total seed funds would equal twenty-five billion dollars in twenty-five years.
The 0.1% of annual budgets (the one billion dollars set aside per year) would not be significant – believe it or not! Budgets at the total level sum up multiple estimates for each projected revenue or expense item.
Accountants use a concept called ‘materiality’ to assess whether an amount would be significant in financial statements to mislead an investor or creditor.[i]We can estimate how ‘material’ or significant a government contribution of 0.1% of annual budgets might be. The following indicates that 0.1% as not materially affecting Canadian tax budgets:
Accounting Coach suggests, “For example, a $20,000 amount will likely be immaterial for a large corporation with a net income of $900,000.” [ii]
As net income is typically 8.9%[iii] of revenue, the Accounting Coach example suggests 0.2% or less of typical organizations’ revenues are immaterial.
Looking at the Canadian Federal government track record of projected budgets vs actual, the most accurate recently for the deficit was in 2018, which was off by $4.1 billion. This $4.1 billion can be looked at in various ways - 22% off from the estimated $18.1 billion deficit, or 1.2% off from the Federal government revenues of $332 Billion, or lastly, only 0.4% off all governments in Canada annual one-trillion-dollar budgets.
The above numbers support that 0.1% would be barely missed each year, even though a billion dollars is enormous to you and me.
For what follows, I will assume a five-year seed fundraising scenario of five billion dollars of annual seed money, assuming a shorter contribution period would more likely succeed politically. Remember, an actual spend vs budgeted spend within 0.5% (five billion dollars) is exceptionally close forecasting on a trillion-dollar budget.
Step two: Grow the seed funds
To reach twenty-five trillion dollars from twenty-five billion in seed money, we need the fund to grow by a multiple of one thousand.
Seed funds should compound at a long-run average rate of 6.7%, assuming the governments would not tax the earnings on this fund[iv]. At this rate, the funds double every ten and a half years. Doubling ten times creates a multiplier of 1,024 – roughly equalling our goal of a one-thousand-time multiplier.
Thus, the overall time to retire taxation is ten and a half years per double multiplied by ten doublings or one hundred and five years. Adding to this the first five years to raise seed funds, the total time required is one-hundred and ten years for the government to retire all taxation, starting from today. (If raising seed money takes twenty-five years, then tax freedom is in the year one hundred and thirty).
Yes, this wait exceeds any individual’s timeline to retire after forty years, but it is a realistic timeline from the perspective of our entire society.
Step three: Plan the payout
After waiting and saving for one-hundred and ten years, we face a choice. Suspend all taxation immediately, or consider alternatives providing even more benefits.
As the fund doubles every ten and a half years, Canada could wait another ten and a half years, one time, before ceasing taxation. The base fund would grow to fifty trillion dollars.
From that point on, one-hundred and twenty-one years from the start, give half the fifty trillion, twenty-five trillion dollars to retire taxation, and allow the remaining twenty-five trillion to double once more. In this scenario, the payout continues indefinitely to add twenty-five trillion every ten and a half years. This cumulatively adds one trillion dollars to the annual budgets every ten and a half years.
Our small actions now ensure our future Canadian society can plan sustainably to address more money for: charity, free pharmaceuticals, free health care, free education throughout the university level, including expenses anywhere in the world, international aid, you name it.
In short, funding could create a society with hope.
Can we achieve this sooner?
To reduce the time to achieve this economic nirvana, we could try one or more of several workable options. All options would increase the political will needed to begin the program:
1) increase the seed fund contributions
a. give every year
b. give more each year
c. give significantly at first
2) borrow some seed funds
a. borrow $250 billion and pay interest. After sixteen years, you have doubled this money
b. continue to borrow more and more as the size of the fund grows
Why didn’t they start this a century ago?
Today financial markets and products offer capabilities our ancestors did not have. In 1900 the stocks on the NYSE were valued at 50% of US GDP or 290 Billion in today’s dollars. Today total stock valuations are one hundred and twenty times larger[v]. A market of this size can support such funding projects. In the early days, the market was mainly financials and transportation, but today is much more widely diversified, reducing risk.[vi]
Perhaps now, with the advances in computerization, telecom, blockchain and fintech, we could figure out how to do this, where we would likely have failed a century ago.
At any point in time, our current needs are a great many, and all are urgent. For us, as for our direct ancestors, current needs are all critical.
Rare is the planning beyond our lifespans. But with tremendous advances in technology and science, we now see the value in decades-long research into nuclear fusion, space exploration, or medicines. The value of long-term projects is evident.
The difference with decades-long projects we have previously undertaken is no defined wait period for achievement and no enticement to sneak a cookie from the jar before payout time. A taxation retirement project must win hearts for the wait within our society and must protect against pilfering.
Will society survive to enjoy tax freedom?
No one knows if an asteroid may hit next year, nuclear war may break out, or climate change becomes an existential disaster.
But somehow, having hope for a better financial future gives cause to be optimistic. Hope strengthens our belief we can overcome obstacles. And, if we don’t start now, our descendants will regret that decision.
By eliminating, not increasing taxes, we can empower a bright future for our society.
Footnotes are available here.
Photo by Clay Banks on Unsplash